Rating Action Commentary
ֳ Affirms Fibabanka at 'B'; Outlook Negative
Mon 23 May, 2022 - 11:08 AM ET
ֳ - London - 23 May 2022: ֳ has affirmed Fibabanka Anonim Sirketi's (Fiba) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'B' with a Negative Outlook and Viability Rating at 'b'.
The Long-Term Local-Currency (LTLC) IDR has been affirmed at 'B+' with a Negative Outlook, one notch above the bank's VR, reflecting our view that the bank's qualifying junior debt (QJD) buffer will be maintained above 10% of risk-weighted assets (RWA) in the short term.
Key Rating Drivers
Fiba's LTFC IDR is driven by its VR but capped at 'B', despite its large buffer of QJD (12% of RWA at end-1Q22), the size of which relative to RWA is positively correlated with the weaker lira. QJD is almost entirely made up of US dollar instruments, largely in the form of FC subordinated debt, but includes some local currency additional Tier 1. The cap reflects our view of government intervention risk in the banking sector. It also reflects our assessment that weaknesses in Turkey's external finances, amid high sector deposit dollarisation and high short-term maturing FC debt in volatile market conditions, make some form of intervention that would impede the bank's ability to service its FC obligations more likely than a sovereign default.
The Negative Outlook on the bank's LTFC IDR primarily mirrors that on the sovereign, but also considers heightened risks to the bank's credit profile given operating environment pressures.
The bank's 'B+' LTLC IDR reflects a lower likelihood of government intervention in local currency. This drives our view that Fiba's large QJD buffer could protect senior obligations in case of default, including in case of a capital shortfall.
The Negative Outlook on the LTLC IDR reflects that on the sovereign, but also captures a potential deterioration of the QJD buffer below 10% if the bank executes a call option on its sub-debt in November 2022, or sub-debt was only partially rolled. In the absence of the call being executed and the subdebt is prolonged, we expect QJD to remain above the 10% threshold. This is based on targeted loan growth of 30% in 2022 (mainly in lira), the current moderate uplift to capital ratios from regulatory forbearance and our expectation of further lira depreciation.
Fiba's senior unsecured debt is rated in line with the bank's FC IDR, reflecting average recoveries for this type of debt.
The bank's 'B' Short-Term IDRs are the only possible option in the 'B' rating category.
Fiba's 'A(tur)'/Negative National Rating reflects ֳ's view that the bank's creditworthiness in local currency relative to other ֳ-rated Turkish issuers is unchanged.
Small Franchise, Moderate Deleverage: Fiba has a small franchise (end-1Q22: 0.5% of sector assets) and limited ability to compete with larger banks in the volatile Turkish operating environment where its operations are concentrated. The bank deleveraged in 2021 (the loan book shrank by 7% net of currency moves), reflecting a cautious approach amid challenging market conditions and capital preservation efforts. Fiba's short-term strategy is to grow unsecured retail loans, underpinned by digital and 'ecosystem banking', and lira-denominated business loans.
Concentrated Portfolio: The loan book is concentrated by borrower and sector, despite deleveraging efforts. Business loans are concentrated in high-risk sectors such as tourism (end-1Q22: 15% of business loans), construction (7%) and energy (5%). The bank's high and growing share of unsecured retail lending is another risk factor. The bank has reduced its FC loan book in recent years to a level significantly below the sector average, although it was still fairly high at 24% at end-1Q22
Asset Quality Risks: Fiba's impaired loans (NPL) ratio (end-1Q22: 2.5%) is below the sector average (2.9%) but should be viewed in light of NPL sales and write-offs (2020-1Q22: equal to a cumulative 1.9% of gross loans) and high Stage 2 loans (14%; about 80% of which were restructured). NPLs are fully covered by total reserves.
Profitability Supported by Investment Income: Fiba's operating profitability rose significantly in 1Q22 (annualised 5.4% of RWA; 2021: 1.9%), but was boosted by a one-off TRY160 million investment income on private equity sales (3.3% adjusted basis), so the core ratio remained in line with 2021. We expect core profitability in 2022 to outperform 2021, notwithstanding pressures on operating expenses in the inflationary environment and on cost of risk.
Pressured Core Capitalisation: Fiba's common equity Tier 1 (CET1) ratio increased to 10.6% at end-1Q22 (9.7% excluding forbearance) from 7.7% at end-2021 (7.1% excluding forbearance), reflecting the conversion by its main shareholder of USD30 million of additional Tier 1 to common equity and high profit in 1Q22. Nevertheless, we still view core capitalisation as weak, given the bank's risk profile, asset quality risks and sensitivity to lira depreciation through potential inflation of the FC component of RWAs, although dollarisation is less than at peers.
The bank's total capital adequacy ratio is higher (23.7%), mainly underpinned by FC subordinated debt (call option in November 2022), which provides a hedge against lira depreciation.
High FC Deposits, Refinancing Risks: Fiba's deposits (end-1Q22: 60% of total funding) are granular but a high 51% are in FC. FC wholesale funding (18%) is also high, which increases refinancing risks, given exposure to investor sentiment amid market volatility. FC liquidity is sufficient to cover Fiba's FC debt due within a year but could come under pressure in case of inability to refinance long-term debts or FC deposit instability.
The bank's 'no support' Government Support Rating (GSR) reflects ֳ's view that support from the Turkish authorities cannot be relied upon, given the bank's small size and limited systemic importance. In addition, support from Fibabanka's shareholders, while possible, cannot be relied upon.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fiba's LTFC IDR is sensitive to a change in its VR. In addition, the rating is sensitive to an increase in ֳ's view of government intervention risk, which currently caps most Turkish banks' LTFC IDRs one notch below the sovereign rating, and to a sovereign downgrade.
Fiba's LTLC IDR is sensitive to a downgrade of its VR and also to a sustained reduction in its QJD buffer to below 10% of RWAs.
The bank's VR could be downgraded due to a marked deterioration in the operating environment, including a deteriorated access to FC wholesale funding or deposit instability that severely eroded the bank's FC liquidity buffer.
A sharp deterioration in underlying asset quality could put pressure on the VR, particularly if it further erodes core capitalisation and leads to a breach of the capital ratios.
The Short-Term IDRs are sensitive to changes in the Long-Term IDRs.
Fiba's National Rating is sensitive to a change in the entity's creditworthiness relative to other rated Turkish issuers. Negative rating action on the LTLC IDR could lead to negative action on the National Rating.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the bank's ratings is unlikely in the near term given the Negative Outlook and ֳ's view of government intervention risk in the banking sector.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The senior unsecured debt rating is driven by Fiba's LTFC IDR, reflecting ֳ's view that default of its senior unsecured obligations would reflect a default of the bank in accordance with ֳ's rating definitions.
Fiba's subordinated notes' ratings have been affirmed at 'B-', one notch below the bank's LTFC IDR, reflecting the bank's large buffer of QJD, which reduces loss severity.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The senior unsecured debt rating is sensitive to any change in Fiba's LTFC IDR.
Fiba's subordinated debt rating is sensitive to any change in its VR anchor rating. It is also sensitive to the size of its QJD buffer. A decline in this buffer to below 10% of RWAs would likely result in a widening of the notching for loss severity to two notches from the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The senior unsecured rating is subject to the same positive sensitivities as Fiba's LTFC IDR. An upgrade of Fiba's LTFC IDR, which is not likely given its Negative Outlook, would lead to an upgrade of the rating.
Fiba's subordinated debt rating is sensitive to a positive change in its VR anchor rating,
VR ADJUSTMENTS
The operating environment score of 'b' for Turkish banks is lower than the category implied score of 'bb', due to the following adjustment reasons: Sovereign rating (negative) and macroeconomic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of FX movements in Turkey.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579
Summary of Financial Adjustments
An adjustment has been made in ֳ's financial spreadsheets of Fiba that has had an impact on core and complimentary metrics. ֳ has taken a loan that was classified as a financial asset measured at fair value through profit and loss in the bank's financial statements and reclassified it under gross loans as we believe this is the most appropriate line in ֳ's spreadsheets to reflect this exposure.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on ֳ's ESG Relevance Scores,
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Fibabanka Anonim Sirketi | UK Issued, EU Endorsed |